Pooled vs segregated SMSFs – what’s the difference, and why does it matter? If you’re setting up a setting up a self-managed super fund (SMSF) with your spouse, family members or other people, understanding how investments are managed and allocated between members is an important starting point.
Some people assume that if they contribute money to an SMSF and use it to purchase gold, shares or cryptocurrency, those investments belong to them personally. But that’s not quite how a multi-member SMSF works.
There are different ways to manage and account for investments within a fund, including pooled arrangements and arrangements that allocate particular investment returns to individual members. Understanding the differences is especially important when members have different investment preferences, retirement goals or account balances.
How does ownership work in a multi-member SMSF?
First, it’s important to understand that SMSF assets are held by the trustees on behalf of the fund, not owned directly by individual members. Each member has their own superannuation balance, representing their interest in the fund, but that doesn’t necessarily mean they own a corresponding percentage of every investment.
How investment income, gains, losses and expenses are allocated depends on the fund’s arrangements, governing rules and accounting records. This is where the distinction between pooled and member-specific investment arrangements becomes important.
What is a pooled SMSF investment structure?
In a pooled arrangement, the fund’s investments are managed collectively rather than allocating particular investments to individual members.
For example, imagine an SMSF with three members:
| Member | Balance |
|---|---|
| Member A | $90,000 |
| Member B | $70,000 |
| Member C | $55,000 |
| Total | $215,000 |
The SMSF holds $150,000 in gold, $45,000 in silver and $20,000 in cash. These investments are held by the fund as a whole, rather than belonging to individual members.
Investment income, gains and losses are allocated between member accounts using an appropriate accounting methodology, which may involve proportional allocation based on their respective balances.
A pooled arrangement can make administration more straightforward because the fund generally maintains a common investment portfolio. However, it also means that members need to understand how collective investment decisions affect their individual superannuation balances.
What is a member-specific investment arrangement?
Some SMSFs may use arrangements that allocate particular investments or their financial performance to individual member accounts. For example, one member might prefer precious metals, while another is interested in shares or cryptocurrency.
Subject to the fund’s trust deed, superannuation law and appropriate accounting arrangements, it may be possible to allocate the income, gains and losses associated with different investments to particular members.
Importantly, the investments still belong to the SMSF. Allocating an investment to a member’s account does not give that member direct legal ownership of the asset.
These arrangements can provide greater flexibility in accounting for different investment preferences, but they generally require more detailed records and administration. Additional accounting costs may also apply.
All trustees remain responsible for the fund’s compliance and investment decisions, regardless of how individual member balances are calculated.
Is this the same as a segregated SMSF for tax purposes?
Not necessarily. The term segregated assets also has a specific meaning under Australian superannuation tax law, particularly when calculating exempt current pension income (ECPI).
For example, certain assets may be treated as segregated current pension assets when they support retirement-phase income streams. The ATO recognises different methods for calculating the income that may be exempt from tax, including the segregated and proportionate methods. You can read more about these methods on the ATO website.
These tax rules are different from the accounting arrangements used to allocate investment returns to individual members. A fund that maintains member-specific investment allocations is not automatically using the segregated method for tax purposes.
Understanding this distinction is important because the terminology can otherwise create confusion, particularly when members move into retirement and begin receiving pensions.
How are SMSF fees and expenses shared?
Another important consideration for multi-member funds is how administration, accounting, audit and other expenses are allocated between members.
Some expenses may be shared proportionately according to member balances, while others may be attributed to particular members where appropriate. The method used depends on the nature of the expense, the fund’s governing rules and its accounting arrangements.
For example, a fund using member-specific investment accounting may incur additional administration costs compared with a fund operating a single pooled portfolio. It’s worth understanding these potential costs before deciding how the fund will operate.
Whatever method is used, expenses need to be allocated appropriately and supported by accurate records.
Pooled vs segregated SMSFs: which arrangement is better?
There’s no single answer. A pooled investment arrangement may be simpler where members have similar investment objectives and are comfortable managing a shared portfolio.
Member-specific investment arrangements may be worth exploring where members have different investment preferences, retirement stages or financial objectives. However, the additional flexibility can also mean greater accounting complexity and expense.
Regardless of the arrangement, trustees must comply with the fund’s investment strategy, trust deed and applicable superannuation laws. Having separate member accounts does not remove the collective responsibilities of SMSF trustees.
Before establishing a multi-member SMSF, it’s worth discussing how investments will be managed, how returns and expenses will be allocated, and what happens when members’ circumstances change.
The bottom line
Understanding the differences between pooled vs segregated SMSFs can help members make more informed decisions about how their fund will be administered. However, it’s important to distinguish member-specific investment accounting from the legal meaning of segregated assets for tax purposes.
Pooled and member-specific investment arrangements can produce different accounting outcomes, particularly when members have different investment preferences or are at different stages of retirement.
The important thing is to understand the arrangements before your fund begins investing, rather than discovering later that they don’t work the way you expected.
If you’re considering a multi-member SMSF, our team can explain the administration and accounting arrangements available and help you understand what’s involved.
General information only. This article does not constitute personal financial, taxation or legal advice. SMSF arrangements must comply with the fund’s trust deed, applicable superannuation and taxation laws, and trustee obligations. An SMSF may not be suitable for everyone.
